Who should not open a cash balance plan this fall

A cash balance plan is a defined benefit plan with a statement that looks familiar. The familiarity is the hazard. Owners see a hypothetical account, hear a large deduction, and file the idea next to a SEP or a profit-sharing contribution they can skip next year. You cannot skip a pension that way. The decision in front of a physician, a dentist, an attorney, a consultant, or any other self-employed owner this fall is not whether the tax result sounds attractive in a good year. It is whether the promise still makes sense in a thinner year. If it does not, the correct move is to leave the plan unadopted.

Sterling Pension Group LLC, in West Hartford, is a third-party administrator. We coordinate independent Enrolled Actuaries. We are not an actuarial firm, and this briefing is not tax, legal, or actuarial advice. The pages that carry the same caution in shorter form are when a plan is not a fit and the September design note at /insights/year-end-window.

A published limit is not a reason to adopt

The 2024 IRS figures, from Notice 2023-75, are easy to recite and easy to misuse. The 401(k) deferral limit is $23,000. The age-50 catch-up is $7,500. The defined contribution annual additions limit is $69,000. Countable compensation is capped at $345,000. The defined benefit annual benefit limit is $275,000. The IRA limit is $7,000. The Service has not released 2025 limits. Nothing in this note depends on a number that is not yet public. The standing table is the IRS COLA page.

The $275,000 benefit limit is not a contribution you are entitled to deposit. A cash balance credit is actuarial. Any owner-level dollar example you have been shown, including any range on a website, is illustrative until an enrolled actuary values your plan. People who come to a design meeting already believing they "get" $275,000, or $69,000 plus $275,000, are not ready to adopt. They are ready to learn the difference between a benefit ceiling and a deposit. The IRS explains the benefit ceiling, not a cash balance cap, on its page about defined benefit plan benefit limits. Publication 560 is the longer small-business booklet, and it is worth reading before you sign anything that uses the word pension.

Do not open one if the cash is only good this year

Minimum funding is the first disqualifier. For a calendar-year defined benefit plan, the minimum contribution is generally due 8.5 months after year-end. That date is September 15 of the following year. If the minimum is missed, the excise tax on Form 5330 can be 10% of the unpaid amount. That obligation does not care that this year's collections were unusual, that a partner is leaving, or that you would prefer to rebuild the operating account.

The deduction timing rule is separate, and mixing the two dates is its own mistake. IRC 404(a)(6) often allows a contribution to be deducted on the return for the year if it is deposited by the due date of that return, including extensions. Your CPA has to apply that rule to your entity. Do not treat the deduction date as if it were September 15, and do not treat September 15 as if it were optional once a deduction has already been claimed. A plan is a poor fit when the only way to fund it is to hope both dates can be ignored.

Ask a blunt question before any illustration is treated as a plan. If 2025 profit were meaningfully lower than 2024 profit, could the business still deposit the required minimum without borrowing, without skipping payroll, and without a fight among owners? If the answer is no, do not adopt. A SEP, a profit-sharing contribution inside a 401(k), or no new plan at all can be the more professional choice. The comparison page is there for that conversation. Flexibility has a price, usually a smaller deduction. Paying that price is rational when income is uneven.

Do not open one on the way out the door

A cash balance plan is a multi-year instrument. It can be frozen or terminated, and termination has its own filings, funding rules, and, where the plan is covered, PBGC involvement. "We can always shut it down" is not the same sentence as "this will be painless in eighteen months." Owners who expect to sell the practice, retire fully, or wind the entity up within a year or two should slow down. The buyer of a professional practice rarely wants a surprise pension. A termination in the second year can cost more in professional time than the first-year deduction was worth, especially once staff benefits, a trust, and a final valuation are included.

The same caution applies to a partnership that is already unstable. A cash balance formula has to be livable for every owner who is in the plan, not only for the owner who asked for the meeting. If two physicians, two dentists, or two name partners cannot agree on who receives a credit, what happens when someone reduces clinical days, and who writes the check if assets underperform the interest crediting rate, the plan is not a fit yet. Adoption does not create agreement. It records the absence of it.

PBGC coverage belongs in this conversation and does not resolve it with a slogan. Coverage is plan-specific. Many small professional-service employers are exempt when they meet the statutory conditions. Many small employers of other kinds are covered. Being a physician, a dentist, an attorney, or a consultant does not by itself answer the question, and being small does not answer it either. Never assume that every small plan is exempt. Start with the agency's own page on PBGC coverage, and have counsel confirm the result for the actual employer before anyone quotes a premium or waves one away.

Do not open one if the census is doing the selling

The second disqualifier is staff, or a refusal to look at staff. A design that works on a cocktail napkin for the owner and collapses when the hygienists, the associates, the nurses, or the long-tenured assistant are added is not a design. It is a brochure. Coverage and nondiscrimination are numerical tests. They are not softened by the fact that you are the rainmaker.

If you already know you will not fund a meaningful staff benefit, say so now and stop. There are lawful ways to shape eligibility, and there are lawful ways a 401(k) and cash balance combination allocates more of the dollar cost to the owner than a naive equal-percentage formula would. There is no lawful way to pretend W-2 employees do not exist. The cost of including them is part of the owner's decision. It is described without romance on the staff cost page. Practices with clinical teams should read /insights/physicians and /insights/dentists before they ask for a one-name illustration. The census briefing is /insights/census-first.

A related failure is the owner who wants the illustration run on "just my corporation" while a second entity employs the staff or holds the real estate and a payroll. Controlled groups and affiliated service groups are legal conclusions, not optional worksheets. If you are not willing to put every entity on the table for your CPA, you are not a candidate for a plan this fall.

Do not open one to replace a deferral you can still make more simply

Some owners do not need a pension. They need to use the 401(k) they already have. In 2024 that means a deferral of up to $23,000, a catch-up of $7,500 if they are age 50 or older, and employer contributions coordinated with the $69,000 annual additions limit. Catch-up deferrals generally sit outside that annual additions limit. For a consultant in the first strong year, or a practice still paying down debt, that defined contribution stack can be enough. Adding a cash balance plan because a peer mentioned one is not a strategy.

The Roth catch-up mandate under SECURE 2.0 does not change this sorting. Notice 2023-62 delayed it through 2025. It is not in force. It will, when it becomes operational beginning January 1, 2026, affect catch-up deposits for participants whose prior-year FICA wages exceeded $150,000. It changes the paired 401(k), not a cash balance formula. It is not a reason to adopt a pension, and it is not a reason to avoid a 401(k) you otherwise need. For 2024, say that the rule is delayed and keep moving.

Do not open one if nobody can sign the work

A cash balance plan needs three professionals who are not the same person. Your CPA has to live with the deduction and the compensation figure, including earned income if you are a sole proprietor or partner rather than a W-2 owner of an S corporation. An independent enrolled actuary has to value the plan and certify Schedule SB. A third-party administrator has to keep the document, the census, and the Form 5500 path coherent. Sterling Pension Group can be the administrator and can coordinate the actuary. We cannot be the actuary, and we should not be used as a substitute for a CPA who has not seen the design.

If your CPA is uncomfortable, listen. If you do not yet have an actuary and you want a number by Friday, you are late in the wrong way. The SECURE Act generally permits a new plan to be adopted by the filing deadline, including extensions. That rule is not an invitation to start the thinking at the filing deadline. Employee deferrals generally cannot be withheld retroactively from payroll that has already been paid. A pension document signed in a hurry, funded with a round number nobody certified, is worse than no plan. Read /insights/db-versus-cash-balance if you are still choosing the shape of the promise, and do not choose it on a deadline you invented.

Administration is not free and it is not finished at adoption. A calendar-year Form 5500 is generally due July 31, extendable to October 15 with Form 5558, and it is filed on EFAST2. Fees for administration, actuarial work, and the trust are recurring. If the only way the deduction "works" is to ignore those costs, the plan is not a fit. The outline of who does what is on the fees page, and the work after the document exists is on the plan lifecycle page.

Do not open one because a calculator printed a large number

Any cash balance credit shown to an owner before a census and a valuation is illustrative. It is not an IRS cap. It is not a quote. Age, pay, the interest crediting rate, existing assets, and the staff census move the result by more than a 401(k) deferral ever will. A younger consultant and an older physician can look at the same benefit limit of $275,000 and be looking at very different annual deposits, neither of which is published in a table. If you need the number to be a specific round figure in order for the plan to feel worth it, you are asking the actuary to reverse-engineer a wish. Competent actuaries will not do that, and you should not hire anyone who will.

The calculator and the illustrations can tell you whether a conversation is in the right neighborhood. They cannot tell you to adopt. If the neighborhood only works when every assumption is perfect, stay with the defined contribution plan you can explain to yourself in a weak quarter.

What a not-fit decision looks like when it is done well

Walking away in September is a successful outcome. You keep the 401(k) deferral opportunity that remains in this year's payroll, you avoid a minimum-funding promise you cannot keep, and you avoid explaining a hypothetical account to employees you did not intend to include. You can revisit the question when income is durable, when the ownership group agrees, and when the census is one you are willing to fund. Nothing about 2024's limits will be wasted if you simply use the ones that belong to a plan you already have.

If you are unsure, the uncertainty itself is information. A fit is not a mood. It is a census you can document, a contribution range your CPA can deduct without pretending the minimum-funding date is the same thing, and a willingness to keep the plan for more than one good year. Owners who have those three things can keep reading about design. Owners who have two of them should wait.

What to do in the next two weeks

Use the next two weeks to try to talk yourself out of the plan. That is a better use of September than collecting optimistic illustrations.

• Ask your CPA, in writing, whether a required pension contribution next year is supportable if profit falls. Do not ask only what you could deduct if this year is repeated.
• List every employee and every related entity. If you are unwilling to show that list to an administrator, stop. The staff cost discussion is the right next page, not a sales call.
• Separate the dates. Write September 15 on one line as the usual calendar-year minimum-funding month-and-day, and write "return due date, including extensions" on the next line. If you cannot explain why they differ, you are not ready to fund anything. Your CPA confirms the actual day for your return.
• If the honest conclusion is that a pension is premature, tell payroll to focus on the 2024 deferral of $23,000, and $7,500 if you are 50 or older, inside the plan you already maintain. Do not open a second plan to avoid that simpler decision.
• If you still believe it is a fit after that review, contact Sterling Pension Group with the census and the CPA's view of cash flow. Ask for a design screen, not a contribution you can wire this month.

A no, reached this week, is cheaper than a yes reached in December.